In previous work we have described a spatially regularised General Linear Model (GLM) for the analysis of brain functional Magnetic Resonance Imaging (fMRI) data where Posterior Probability Maps (PPMs) are used to characterise regionally specific effects. The spatial regularisation is defined over regression coefficients via a Laplacian kernel matrix and embodies prior knowledge that evoked responses are spatially contiguous and locally homogeneous. In this paper we propose to finesse this Bayesian framework by specifying spatial priors using Sparse Spatial Basis Functions (SSBFs). These are defined via a hierarchical probabilistic model which, when inverted, automatically selects an appropriate subset of basis functions. The method includes non-linear wavelet shrinkage as a special case. As compared to Laplacian spatial priors, SSBFs allow for spatial variations in signal smoothness, are more computationally efficient and are robust to heteroscedastic noise. Results are shown on synthetic data and on data from an event-related fMRI experiment.